Turning your vacation home into a short-term rental might sound like a great way to cover the mortgage (and maybe even fund your next getaway). But before you list your beach bungalow or mountain cabin on a short-term rental site like Vrbo or Airbnb, you need to understand how the IRS views this kind of income.

Here’s a breakdown of the tax rules for renting out your vacation home.

Is it a personal residence or a rental property?

The tax treatment of your vacation home depends on how you use it during the year. The IRS draws a clear line based on days of personal use vs. rental use.

• Personal use includes days you or your family stay there, even if you’re “just checking on things” or doing maintenance.
• Rental use includes days you rent the home at fair market value to someone else.

If you rent it out for 14 days or fewer during the year, congratulations—you’ve unlocked the IRS’s version of a free lunch. You don’t have to report the rental income at all, no matter how much you earn. That’s known as the Augusta Rule, named after the town where homeowners rent out homes during the Masters golf tournament.

But if you rent it out for more than 14 days, things get more complex, and Uncle Sam wants his cut.

How to track days for your vacation home rental

If you rent the property for more than 14 days and use it for personal stays, you’ll need to count the days carefully. Days spent traveling to and from the property for rental-related purposes don’t count as personal use. However, if family members use the property (even if they pay rent), those days typically count as personal use unless you can prove they paid a fair rental price.

Once you know the number of business and personal use days, the IRS uses a personal-use threshold to determine how much you can deduct.

• If you use the property personally for more than 14 days or more than 10% of the total days it’s rented, whichever is greater, it’s considered a personal residence with rental use.
• If your personal use stays below that threshold, it’s treated as a rental property, and you can typically deduct more rental expenses.

Translation? The IRS pays attention to whether this is a vacation home with a side hustle or a business with a view.

What can you deduct?

If your vacation home qualifies as a rental property, you can deduct the business portion of these rental expenses:

• Mortgage interest
• Real estate taxes
• Repairs and maintenance
• Depreciation
• Utilities
• Insurance
• Management fees
• Homeowner or condo association dues
• Advertising expenses
• Traveling to and from the rental property for maintenance

You’ll report rental income and expenses on Schedule E (Form 1040). But if the home is considered a personal residence (due to high personal use), your deductions are limited. You can only deduct rental expenses up to the amount of rental income—no losses allowed.

So if you had dreams of using your rental to wipe out your tax bill, the IRS says: “Nice try.”

Allocating expenses between personal and rental use

If you use the home for both personal and rental purposes, you’ll need to pro-rate your expenses. That means splitting costs based on the number of rental vs. personal days.

For example, say you rent the home out for 273 days and use it for 92 days.

You’ll calculate the deductible portion of expenses as follows:

92 days / 365 days = 75%

So you can deduct 75% of the expenses as rental-related.

Just be prepared to document everything. The IRS will want receipts if they ever audit your return.

What about depreciation?

If your vacation home is a rental property for tax purposes, you can depreciate the building (but not the land) over 27.5 years.

Depreciation lets you deduct a portion of the cost of an asset over several years to account for its reduction in value over time from wear and tear (even if real estate typically appreciates instead of depreciating).

Claiming depreciation expenses helps reduce your taxable income, even if you don’t shell out any cash that year. But there’s a downside: when you sell the property, you may have to “recapture” those depreciation deductions, and they’re taxed at a higher rate than other long-term capital gains. Make sure you discuss depreciation recapture with your tax advisor and factor it into your tax planning.

Don’t forget about state and local rules for short-term rentals

If your vacation property counts as a rental, don’t forget about state and local taxes. Some areas require vacation rental permits, charge lodging or occupancy taxes, or have rules on short-term rentals. If you’re not sure, check with your local tax office or a CPA who knows your area. The last thing you want is a surprise bill from your city eating away at your rental income.

Smart tax planning for your little slice of paradise

Renting out your vacation home can be a smart move, but the tax rules are anything but relaxing. Keep good records, count your days carefully, and don’t assume all income is tax-free. When in doubt, check with a tax advisor who can help you navigate the details.

After all, you want your vacation home to generate income—not an audit.

Want help figuring out how to report your vacation rental income or optimize your deductions? Please reach out! We can help make sense of the numbers so you can get back to enjoying the view.